Tuesday, November 27, 2012

Hungary to mull further rate cuts if inflation, risks low

Hungary’s central bank, which cut its base rate for the fourth time this year, will consider further rate cuts if inflation continues to fall and financial markets remain confident about the country. Magyar Nemzeti Bank repeated last month's statement that it expects inflation to remain well above the bank’s target this year and 2013 but then decline as the disinflationary impact of weak demand dominates and the effect of one-off price level shocks subside. The National Bank of Hungary expects inflation to meet its 3.0 percent target in 2014, but cautioned it is crucial that wage increases next year are consistent with productivity improvements so cost pressures can be eased and employment levels can be increased. Inflation in Hungary eased in October to 6.0 percent from a year-high of 6.6 percent in September due to lower fuel prices and administered prices. Earlier today the central bank cut its base rate by 25 basis points to 6.0 percent and has now cut the rate by 100 basis points this year. “The short-term outlook for inflation improved, mostly as a result of favourable developments in non-core inflation items,” the bank said, adding that a sustained drop in Hungarian risk premia may also help the medium-term inflation outlook. Hungary’s economy is in recession and the central bank said there was a “substantial margin of spare capacity” that would help buffer any cost shocks. “Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level,” the central bank said, adding: “The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment continues and the medium-term outlook for inflation remains consistent with the 3 percent target.” Last month the central bank made a similar statement. The central bank said it was “crucial” that Hungary’s government and the European Union and International Monetary Fund reach an agreement following S&P’s downgrade of Hungarian debt, which could lead to an increase in the perceptions of the risk of investing in the country. An agreement would contribute to a decline in yields and help supporting lending and improve the investment climate. Hungary’s economy is first expected to grow in 2013 as export markets recover but the central bank expects output to remain “persistently below its potential level and the labour market will remain loose.” Hungary's Gross Domestic Product contracted by 0.2 percent in the third quarter from the second, the third monthly contraction in a row, for an annual decline of 1.5 percent, up from an annual shrinkage of 1.3 percent in the second quarter.